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ECONOMICS. CHAPTER 1
WHAT IS ECONOMICS?
ALFRED MARSHALL - First person to apply mathematics to economics.
! *Father of the supply and demand.
We need a well-functioning system for coordinating productive activities (activities that create the goods and services).
ECONOMY: System for coordinating society’s productive activities.
ECONOMICS: Science that studies the production, distribution and consumption of goods and services.
ADAM SMITH (1723 - 1790) ! *Invisible hand that organizes the productive activities.
Refers to the way in which the individual pursuit of selfinterest can lead to good results for society as a whole.
People think about their interests but at the same time they give people goods and services MARKET ECONOMY (Capitalism) - The decisions about production and consumption are in individual choice.
! *There is no central authority telling people what to produce or where to ship it.
COMMAND ECONOMY - Alternative to the market economy.
! *There is a central authority making decisions abotut production and consumption.
KARL MARX (1818 - 1883) - The communist manifesto ! Why capitalism fails: ! 1.The more wealth is created, the more miserable the masses will become.
! 2.The more wealth is created, the more extensive and destructive the economic crisis will become.
MICROECONOMICS - Branch of the economy that studies how people make decisions and how these decisions interact.
*The proved successful are market economies that take advantages of the “power of the invisible hand”.
Sometimes the individual pursuit of self-interest, instead of promoting the interests of society as a whole, can actually make society worse off. --- My benefit becomes a cost for you.
MARKET FAILURE - Economics helps us to diagnose and prevent those market failures (Often can devise solutions).
RECESSION: Market failure. -- Most important ones: The Great Depression (1929), The Great Recession (2007).
MACROECONOMICS - Branch of economics that is concerned with overall ups and downs in the economy.
! -ECONOMIC GROWTH - Gorwing ability of the economy to produce goods and services.
ECONOMICS. CHAPTER 1 PRINCIPLES THAT UNDERLINE INDIVIDUAL CHOICE: THE CORE OF ECONOMICS.
Individual choice - Decision by and individual of what to do, which necessarily involves a decision of what to do or not.
1.CHOICES ARE NECESSARY BECAUSE RESOURCES ARE SCARCE.
! Resources are scarce when there’s not enough of it avaliable to cover or satisfy all the ways society wants ! to use it.
! ! ! Resource is anything that can be used to produce something else.
*Individuals (and society as well) must make choices because resources are scarce.
*SOCIETY AS A WHOLE MUST MAKE CHOICES EVERYDAY.
2.THE TRUE COST OF SOMETHING IS THE OPPORTUNITY COST.
! Opportunity cost - What you must give up in order to get an item you want.
! ! -What you forgo by not choosing your best next alternative.
! *Every choice you make means forgoing some other alternative.
! The COST is not the MONETARY COST -- It’s the OPPORTUNITY COST! 3.”HOW MUCH” DECISIONS (“EITHER-OR” DECISIONS).
! ! Comparing the costs and benefits of choosing/doing some things or another ones.
MARGINAL ANALYSIS: Analysis of the benefits and costs of the marginal unit of a good or input. It helps ! to make decisions.
! *MARGINAL DECISIONS: Decisions about wether to do a bit more or a bit lees of an activity.
! INCENTIVE: Anything that offers rewards to people who change their behaviour.
! *Opportunity to make oneself better off.
! ! -Individual respond to incentives (the cost, the price, the quality...) 4.PEOPLE USUALLY RESPOND TO INCENTIVES.
! People usually respond to incentives, exploiting opportunities to make themselves better off.
CHOICE INTERACTION: HOW ECONOMIES WORK.
5.THERE ARE GAINS FROM TRADE.
! TRADE: The key to a much better standard of life for everybody. -- Consists in dividing tasks and each ! ! person provides a good or service that other people want in return for different goods and services.
*Economy as a whole works so much better when people specializes in a task and trades with others.
! THERE ARE GAINS FROM TRADE.
! -Self-sufficiency (taking care of all its own needs) is really hard.
6.MARKETS MOVE TOWARD EQUILIBRIUM.
! EQUILIBRIUM: Situation in which individuals cannot make themselves better off by doing something ! different.
! BECAUSE PEOPLE RESPOND TO INCENTIVES, MARKETS MOVE TOWARD EQUILIBRIUM.
! *Markets reach equilibrium via changes of prices.
ECONOMICS. CHAPTER 1 7.RESOURCES SHOULD BE USED IN AN EFFICIENT WAY.
! Resources should be used as efficiently as possible to achieve society’s goals.
! EQUITY: Everyone gets his or her fair share.
! ! EQUITY = FAIRNESS.
! *There’s a big confrontation between efficiency and equity.
8.MARKETS USUALLY LEAD TO EFFICIENCY.
! Because people usually exploit gains from trade, markets usually lead to efficiency.
9.GOVERNMENT INTERVENTION CAN IMPROVE SOCIETY’S WELFARE.
! When markets don’t achieve efficiency, government intervention can improve society’s welfare.
! *Designed government policy can sometimes move society closer to an efficient outcome by changing ! how society’s resources are used.
10.ONE PERSON’S SPENDING IS ANOTHER PERSON’S INCOME.
! Because of it, a chain reaction of changes in spending behavior tends to have repercussions that spread ! through the economy.
! For example: When there’s less business investemnt, there’s less family income and families respond by ! reducing consumers spending.! 11.OVERALL SPENDING SOMETIMES GETS OUT OF LINE WITH THE ECONOMY’S PRODUCTIVE CAPACITY.
! When economy experiences inflation (overall spending is too high) there’s a rise in prices throughout the ! economy.
! *That’s because when the amount of people want to buy outstrips the supply, producers can raise their ! prices and still find willing costumers.
12.GOVERNMENT POLICIEES CAN CHANGE SPENDING.
! The government itself does a lot of spending on everything (from military equipment to education), and it ! can choose to do more or less.!! ! ! The government can, as well, decide or vary how much it collects from the public in taxes, which in turn affects how much income consumers and businesses have left to spend.